Supply chain networks in the Indo-Pacific are selectively reconfiguring and diversifying away from China due to black swan events such as the COVID-19 pandemic and the risk of weaponization of sensitive technologies, supply chains and rare earth materials.
Semiconductors have been of particular concern, as has Taiwan Semiconductor Manufacturing Co (TSMC). Given its dominant position producing 92 percent of the world’s advanced (10 nanometer or smaller) chips, and after the COVID-19 pandemic exposed vulnerabilities and shortages in the chip supply chain, TSMC suddenly found itself in the spotlight amid a US-China technology rivalry.
In its attempt to diversify from China, TSMC has looked to Kaohsiung in southern Taiwan as a new manufacturing hub.
On Aug. 8, TSMC and the Kaohsiung City Government held a groundbreaking ceremony at the Nanzih Technology Industrial Park, where its new plant is to be built.
This was followed last month by visits from President Tsai Ing-wen (蔡英文) and former US secretary of state Mike Pompeo to promote Kaohsiung as a new hub for high-tech business investments.
TSMC’s Kaohsiung fab is to produce 7 nanometer and 28 nanometer chips — the latter mainly for the automotive industry and especially important for German auto manufacturers. The chip giant is planning to spend US$100 billion over several years to expand its production capacity within Taiwan, as well as in the US and Japan.
Nanzih Technology Industrial Park is projected to become the core of Taiwan’s southern semiconductor “S corridor,” a policy priority envisioned by Kaohsiung Mayor Chen Chi-mai’s (陳其邁) administration to form a technology industrial cluster in Kaohsiung.
The project would connect the Tainan Science Park, Renwu Industrial Park, Ciaotou Science and Technology Park and Nanzih Technology Industrial Park in an S-shaped corridor.
Besides TSMC, other major technology companies such as Germany-based Merck Group, Netherlands-based NXP and Win Semiconductors Corp have already been attracted to the area, and Nanzih Technology Industrial Park is home to Advanced Semiconductor Engineering Inc — Taiwan’s second-largest semiconductor company.
With well-established high-tech clusters in Hsinchu and Tainan, Kaohsiung could seem an odd choice for TSMC given its historic reputation as a “rust belt city” and an industrial zone.
However, factors over the past year pushed Kaohsiung to the fore as TSMC’s place of choice for domestic expansion.
As TSMC already has Fab 18 in the Tainan Science Park, it looked to a nearby 300 hectare plot for the next phase of its expansion process.
A CommonWealth Magazine article said that the Southern Taiwan Science Park had scheduled its land expropriation for expansion to take place next year, but the Kaohsiung site offer came in earlier.
Kaohsiung is also a traditional stronghold for Tsai’s Democratic Progressive Party, as well as for Chen.
However, the city’s water supply might be the key reason for TSMC’s selection. Last year, Taiwan had its worst drought in 56 years, sending TSMC and other chipmakers scrambling for water needed for the manufacturing processes, with tanker trucks transporting water from Kaohsiung.
This incident highlighted the challenge that water scarcity places on the semiconductor industry as a whole, as TSMC and Intel fabs in Phoenix, Arizona, also face similar land and water constraints.
With the entry of TSMC into the “S corridor,” Kaohsiung and southern Taiwan are emerging as a critical node, not only in the global semiconductor supply chain, but also as a key logistics hub in support of Tsai’s New Southbound Policy for further trade integration in the Indo-Pacific region.
Kaohsiung is also the largest port in Taiwan and ranks as the 15th-largest in the world, ahead of Germany’s Hamburg at 17 and the US’ Long Beach at 22. As the “S corridor” and related tertiary business and service sectors expand, Kaohsiung is poised to become a key center for trade and logistics in the Indo-Pacific.
Taiwanese defense analysts have proposed that the Port of Kaohsiung could become a cooperative security location now that the US no longer has access to Hong Kong’s port.
This could work in conjunction with NATO’s exploration for cooperative security and enhanced opportunities partnership roles for Asian nations such as Japan and South Korea, and possibly Singapore and Taiwan, as they are world leaders in multiple emerging and disruptive technology sectors.
Despite not being an Asian NATO partner, Singapore has already been involved with NATO Science and Technology Organization events. Likewise, as Taiwan is a de facto major non-NATO ally, it could potentially engage in similar cooperative security exchanges — especially in the field of maritime technology.
Some US analysts want to take a step further, such as Pompeo’s China advisor Miles Yu (余茂春), who proposed enlarging the NATO alliance to bring Indo-Pacific countries into a broader North-Atlantic Indo-Pacific Treaty Organization (NAIPTO) to confront a rising China.
However, others express doubts that this would come to fruition.
In an e-mail interview, NATO Defense College Foundation director Alessandro Politi wrote: “China, unless it follows the path of Russia regarding Taiwan, will not be considered a threat” by many NATO members, and surely not a priority as long as the Ukraine conflict is ongoing.
“NATO has a very precise geographic definition of its treaty and on this hinges Article 5, even in Kiev’s case,” he added.
As such, the more realistic scenario to enhance security of the Transatlantic and Indo-Pacific supply chain might not be an expanded NAIPTO military alliance — which would denote decoupling from China — but instead a targeted “high-tech alliance,” as proposed by former NATO secretary-general Anders Fogh Rasmussen.
NATO can engage Asian partners in cooperative security of emerging and disruptive technology sectors, while continuing economic interdependence and selective diversification from China, given it remains a top trading partner for Taiwan, Japan, and other Asian and European countries.
Even Taiwan’s TSMC received an exemption from Washington’s new semiconductor export control regulations, allowing it to continue the expansion of its Nanjing manufacturing facility in China.
As James Lewis, senior vice president and director of the strategic technologies program at the Center for Strategic and International Studies, said, increasing diversification and supply chain sovereignty “does not mean the end of interdependence, but more emphasis on indigenous production and regional supply chains.”
To that end, the role of Kaohsiung is likely to continue rising in the ongoing regionalization of the Indo-Pacific high-tech supply chain.
Christina Lin is a 2022 Taiwan fellow at the Ministry of Foreign Affairs, and a guest academic in the department of Asia-Pacific Industrial and Business Management at National University of Kaohsiung. She has extensive US government experience working on Chinese security issues, and is a contributing author of the volume NATO and Asia-Pacific.
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